Performance Perspectives Blog

Dealing with the underfunding of pension funds

by | Jan 25, 2013

I recently interviewed Phil Page of Cardano for The Journal of Performance Measurement(r), regarding the all-too-common situation that many (most?) pension funds, both private and public, are facing: underfunding. Phil identified three possible solutions:

1) increase contributions (from the company, for private; from the taxpayer, for public)
2) increase returns (most likely from taking on more risk)
3) reduce benefits.

When I was the (part-time; meaning only 25 hours a week!) mayor of the Township of North Brunswick (2000-2003), the New Jersey state police pension fund was OVER funded; and so, we got a gift: we weren’t obligated to provide our traditional funding, which saved us around $1 million a year, which we used to reduce property taxes. A few years later, after I was out of office, and as a result of the crisis started by the subprime mortgage debacle, the fund was severely underfunded, meaning more money was needed from the municipalities, meaning increases in property taxes.

It appears evident that many pension funds are attempting to increase their returns. Just this week, in The Wall Street Journal, we had two articles address investment methodologies being employed (“Money Magic: Bonds Act Like Stocks” (1/22/13) and “Pensions Bet Big With Private Equity” (1/25/13)). Have the funds’ appetites for risk taking increased, or have they concluded that the alternatives (increased funding / reduced benefits) are steps they wish to avoid?

On the public side, I can see how we got into the mess we’re in. Politicians, seeking the support of police unions, for example, were all too quick to grant attractive pension benefits (I recall hearing of a municipality in California, that gives its police officers 85% of their highest pay, after working something like 25 years…AMAZING!). When the benefits are initially granted, or even boosted, the politicians in office are immune to their impact; at least the brunt of it. And so, they reap the benefits of union support, while passing on the funding challenges to their successors: clever. Imagine what will happen today, if a mayor or governor tries to get their police unions to agree to reduce their benefits.

As for additional funding, as a taxpayer I have little interest in providing more of my money to pension funds that have, due to no fault of mine, run low, so that the beneficiaries can receive pensions that most of us in the private sector could only dream about.

While I am happy that I am no longer a politician, I fear for how this mess will be resolved.

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